Financial Markets Overlook – The Basics
The Information Superhighway is a new marketing frontier that many new traders and investors could take advantage of, spawning hundreds of new potential markets, consumer bases, products, and services. Indeed, the dawn of electronic trading is upon us. But this isn’t really a new phenomenon—these products have been accessible to many a bigwig shareholder, depositor, multinational bank and economic expert since the early nineties when the Internet was still in its infancy.
Take note that these are mutually exclusive markets—that is, you need to approach them on a case-to-case basis. Another issue to consider is the current state of the economy. What these factors mean to you as a private investor is that you need to realistically evaluate your strengths and weaknesses, choose a market that’s most appropriate to your capabilities and develop yourself in order to make your chosen market grow and be profitable. In any case, there are several markets available to you. Pick the one that most suits your investment style and personality.
Capital Markets
Capital markets are principally security markets where you think more of long-term profit instead of immediate gratification. Many companies both private and public need this sort of investment, which comes in the form of stocks and bonds bought in a sale of securities in the name of the company. It’s very easy to get into, but keep in mind that it only has some degree of prospective advantages and market control. With limited risk comes limited reward, unless of course, you count the safety and security of your investment as a reward.
Capital market investment has risen to phenomenal heights during the last decade, and as such is heavily regulated by entities such as the Securities and Exchange Commission (SEC). In the face of the current economic woes troubling the United States today, it’s common knowledge that the capital market’s large amount of shareholders, myriad of products and services, and government intervention—most especially government intervention, as seen by the dire consequences that the free market has unleashed to the world economy—make capital market investment a secure and reliable one for amateur investors.
Stocks
This is the type of investment market that many a layman is most familiar with; especially nowadays, what with the financial crash being the talk of the town. The ins and outs of the stock market are readily comprehensible and offer an array of products and services to invest in, just like capital markets. Unlike capital markets, however, stock markets have a higher potential for profit and a high liquidity that helps would-be investors to pull out with ease.
In any case, it’s rather lamentable that the current credit squeeze is really hitting this type of market hard. The aforesaid liquidity and surplus of credit have currently left this market, for all intents and purposes, dead in the water. That’s one rather nasty disadvantage of investing in stocks—it’s affected by the regular goings on in the world exactly because the investor confidence dictates the value of shares. All in all, it’s the classic high risk, high reward type of market.
Bond Markets
Much bigger than the stock market in ostensible terms, bond markets (also known as credit, debt, or fixed-income markets) are traded or bought over-the-counter by the trillions worldwide; especially in the US, where its current economy is a debt-based type of financial system. Compared to either the stock market or the capital market, it’s a low risk, the low return type of market, especially in contrast to the type of profits stocks get in the long term.
To the layman, a bond is analogous to a loan, and like most loans, profit can only come from interest, so since annual interest rates are traditionally low to make up for their cumulative effect, it’s little wonder that this credit-type investment has small yields in regards to overall revenue.
Mutual Funds
The mutual funds market has grown dramatically in the last thirty years or so. Mutual funds are principally a cooperative pool of money handled by a professional fund manager. The worth of a stake of the mutual fund pie—otherwise known as the Net Asset Value (NAV)—is computed on a day-by-day basis using the fund’s total value split by the sum total of remaining shares.
Stock exchange via the mutual fund method can help in diversifying your portfolio by means of your fund manager investing the fund on a wide variety of sectors and businesses, thus giving you the kind of security capital and bond markets share, but with a higher (though not all that spectacular) yield.
Index Investing
Index investing is basically buying an index (that is, a sample of the market, not unlike a poll in an election poll or a sample demographics in a survey) through methods such as index mutual funds (which aid a lot in diversification) and exchange-traded funds (which allows for low-expense ratios). Index buying is advantageous to analytical and calculating investors because it allows them more control, more upside potential and less risk provided that they know what they’re doing and that they’re flexible enough to predict and benefit from market fluctuations.
The Dow Jones Industrial Average (DJIA), Standard and Poor 500s Index (S&P 500), and NASDAQ are just some of the ‘indices’ that people refer to when investing in the market. It’s also one of the methods you can use to make your investment worthwhile, profitable, and secure—but doesn’t be so naive as to buy a whole index, or else it can and will bite you back depending on the ebb and flow of the market. As seen in the current global economy, the disadvantages of relying on index investing are readily apparent.
Cash or Spot Market
This type of investment is a bit more advanced and complex than those previously mentioned. Like the stock market, the spot market allows chances for both big wins and losses—it’s just as high risk as any other market that uses leverages to make a profit, but if you hit it big, the payoff will be worth it. Also, the gains that you can achieve through this market are instantaneous and direct. You get your profit settled in cash and at the latest market prices in one month or less, instead of forwarding prices that’ll take years for you to earn your keep.
If you’re an inexperienced trader, it’s advised that you don’t immediately jump into this market, because it eats newcomers up and punishes the slightest of erroneous decisions with impunity. This is the type of market that only those with prior trading experience, corporate backing, hedge funds and limited partnerships can perform well. The market’s complexity lies with the fact that you need to be very knowledgeable of macroeconomics and have above par trading skills, because this is definitely a sink or swim operation.
Of course, since the high-leverage spot market has the allure of a multi-million-dollar lottery, there is still a whole army of private shareholders and traders attracted to the possible rewards it promises—which is such a shame for them because its high leverage is the very aspect that wipes out many first-time investors.
Professional traders generally avoid this leverage trap by not trading fully leverage—instead, they make use of disciplined cash administration systems to maximize their profit without running a too-high risk of loss. As such, if you really want to enter this market but you’re not exactly a seasoned veteran yet, then consult with a professional trader. On the other hand, since crude oil is the type of investment that uses the spot market methodology, it should be clear to you the great risks of this high-yield market. A quick buck always has a catch.
Derivatives Market
A market whose worth is derived from primary resources, the Derivatives Market’s price is determined by the market price of its core asset. It also has leverage potential that can yield high rewards for an investor, but just like its spot market counterpart, there’s a need for the green and untested investor to ask assistance from a professional trader with a sound risk management program in order to not get wiped out by the dangerous business of high leverages.
Unfortunately, nowadays, the derivatives market had been hit just as hard as the stock market (if not more so) by the economic downturn. The losses suffered here has been covered and scrutinized by the media, simply because the market is so complex and perplexing that many financial experts use this obfuscation as a way to exploit it—assigning leverages on products that shouldn’t have that much value in the first place—which, as we’ve seen in the current news, resulted in huge losses once the smoke has cleared and the truth came out.
Your expedition into the financial market as an investor will yield equal chances of success and failure, depend on the type of market you choose. Because of the Internet and the Information Revolution, these markets have become more accessible than ever before, but that doesn’t mean that each and every last option will likewise be tailored to your liking. Don’t confuse availability with effectiveness. As such, it’s important for you to understand the market and yourself so that once you make the decision of which market to invest in, you’ll make an informed, fitting choice.
Investment Tips:
Educating yourself in the financial world will give you the know-how and basics that you will need in order to take control of your personal and business finances.
For those of you who are looking to move up the financial ladder and improve their career status and even your personal knowledge, education is the only way to do so, that being said it does not mean that you need to find yourself sitting in a classroom listening to long lectures because all this information is accessible to you online.
The right knowledge in the financial world will also undoubtedly improve your income but if you are looking to educate yourself in order to make money online than there are many ways that you can make an extra monthly income.
If you are interested in making your own investments and not relying on someone else’s know-how than you need to know the basics of where and how to build a profitable long-term portfolio.
We strongly advise you to learn the basics before investing on your own, you can get the basics by starting with these very informative blog posts and get a clearer view of how to do it right.
1. Fundamentals Of The Stock Market
